Determining Total Enterprise Value and Structuring a Deal to Buy the John M Case

John M Case Company

Determining Total Enterprise Value and structuring a deal to buy the John M Case

Company

Executive Summary:

In order to maintain current level of autonomy over operations, career continuity, as well as further their plan

of growing the company through diversification, the management team of the John Case Company, led by

Anthony Johnson, were justified to buy the company from John M Case, president and sole owner of the

company. Analyzing the present value of the future cash flows of the company the firm value is estimated to be

$22.492 million, and therefore the asking price of $20 million is justified. The management team can structure

a winning deal to buy the company using bank loans, Mr. Case’s sellers’ coupon & VC loan. To provide a 20%

return for the VC, the firm must payout $12.809 million using warrants and short term loan. However, a

sensitivity analysis on the VC’s required rate of return shows that a 25% rate of return would require the firm

to payout $23.608 million, which is close to the 90% value of the firm (Exhibit 10). Therefore, we expect the VC

to exercise a high level of monitoring and control, should they decide to give the entire $ 6 million loan.

Key assumptions for the recommendation:

1. A marginal tax rate is estimated using the regression on the relationship between Profit before tax and tax.

The regression result is used for estimating taxes on NOPAT from 1985-1992. For 1993, as tax shields in Puerto

Rico are lifted, the tax rate is assumed to be 35%.

2. Forecasts for 1991-1993 are done predominately by assuming most costs as a % of sales. Detailed

description for forecasting each line item and associated drivers is provided in the Analysis section.

3. The loan amount payable to the VC post 5 years is assumed to have no discount factor schedule.

4. All remaining cash flows in the year 1991-1993 are used to pay-off the VC money, and in the last year of the

VC’s payment, the warrants are granted and exercised.

5. Excess cash is assumed to be equal to $3.5 million and consequently is paid out in the first year. Remaining

cash on the balance sheet which was not used to fund the purchase of the company is assumed to be required

cash for operations. The high value of that is attributed to the seasonal nature of the business.

Analysis:

The management is justified to attempt to buy the company due to the several reasons. The company

enjoys a great market position, steady growth and is facing little competition in the industry. Given the current

owners desire to put the business for sale is purely personal, the current management team is well positioned

to evaluate the opportunity absent external pressures and has the detailed internal knowledge to accurately

evaluate the value of the firm. Additionally, the top 4 executives of the company have been part of the company

for quite some time. The opportunity to buy the firm allows the management team to further invest time and

effort to grow the company and to benefit from the profits of the company in the future. Evaluating the value of

the firm involves the following steps:

1. The forecasts for 1991-1993 are generated using the key drivers for net income identified in Exhibit

2. The drivers are then used to project Net sales, EBIT, Capes & working capital from 1991-1993.

2. Free operating cash flows to the firm for 1985-1993 is then calculated as shown in Exhibit 1 & Exhibit

2. The tax on the EBIT is calculated using the regression estimate (Exhibit 9) to